Canada Phone Stocks Underperform as Competition Looms

Canadian telecommunications companies, including Rogers Communications Inc. (RCI/B), are on pace for their worst performance in five years as investors worry government regulations and more competition will weigh on profits.

The group of telecommunications companies on the benchmark index was up 2 percent this year through yesterday, the smallest increase among 10 industries in Canada, according to data compiled by Bloomberg. The phone companies rose less than 1 percent in 2009, the last time they trailed every other industry group in the country on an annual basis. Meanwhile, Canada’s overall S&P/TSX Composite Index (SPTSX) of 251 companies had gained 12 percent since December.

To bolster competition, the Canadian government has pushed to create a fourth national wireless operator for more than six years, selling spectrum at a discount to new entrants and setting aside additional airwaves for smaller carriers. Montreal-based Quebecor Inc. (QBR/B) has said it’s ready to expand nationally under the right circumstances, such as lower roaming charges, raising the possibility of new competition for BCE Inc. (BCE), Rogers and Telus Corp. (T), which together serve 90 percent of the country’s wireless customers.

“If we just knew what was going to happen with the government, at least the market would able to price that in, but we just don’t know,” Troy Crandall, a Montreal-based analyst at MacDougall, MacDougall & MacTier Inc., said in a phone interview. “If there’s anything investors hate, it’s either uncertainty or risk, and we’ve got both those right now with the telecoms.”

Rogers Results

Crandall recommends holding shares of Rogers and BCE and buying Telus and Quebecor stock.

BCE, Canada’s biggest telecommunications company, announced today that it plans to buy the shares of Bell Aliant Inc. that it doesn’t already own for C$3.95 billion ($3.68 billion) in cash and stock.

BCE rose 1.7 percent to C$49.82 today, the most since February. The telecommunications stocks in the S&P/TSX Composite Index added 1.1 percent today.

Rogers plans to report earnings results before the market opens tomorrow, the first of the major Canadian telecommunications companies. Analysts estimate Rogers will post second-quarter adjusted earnings of 84 Canadian cents a share, down from 96 cents a year ago, according to data compiled by Bloomberg. Revenue is projected to drop for a third-straight quarter.

Rogers had fallen 12 percent this year through yesterday, the biggest decline among the Canadian wireless companies. In the first quarter, Rogers signed up fewer customers than its rivals as Chief Executive Officer Guy Laurence, who took the helm in December, says he’s focusing on creating long-term value instead of subscriber growth.

‘Government’s Determination’

Patricia Trott, a spokeswoman for Toronto-based Rogers, didn’t return a phone message requesting comment on the company’s stock performance.

BCE, Rogers and Telus have all seen ratings downgrades from analysts in the last six months. Bank of America Corp. analyst Glen Campbell lowered his rating on Telus and Rogers to hold from buy after the government said earlier this month it would set aside a new block of wireless spectrum for small players.

“We see no wavering in the government’s determination to have sustainable four-player competition in all regions, with the objective of increasing price competition,” Campbell wrote in a July 6 research note.

(An earlier version of this story was corrected to adjust the analyst’s ratings in the fifth paragraph.)

To contact the reporters on this story: Gerrit De Vynck in Toronto at gdevynck@bloomberg.net; Christina Pellegrini in Toronto at cpellegrini3@bloomberg.net

To contact the editors responsible for this story: Sarah Rabil at srabil@bloomberg.net Stephen West

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